Electronic Arts Stock Has a Long Runway for Growth

EA is in the middle of a successful transition to digital gaming

Electronic Arts (NASDAQ:EA) stock is up 3.85% year-to-date. But it hasn’t been a linear ride for the video game manufacturer. EA stock has largely been trading sideways in a range of $90-$100 per share.

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This doesn’t mean EA has not had a successful year. 2019 has seen the release of “Madden 20” and the launch of “Apex Legends.” The latter is EA’s first foray into the free-to-play gaming space. Prior to Apex, Epic Games’ massively popular “Fortnite” virtually stood alone in this space.

Perhaps no industry suffers from ‘next new thing syndrome’ more than the video game industry. Gamers are always looking for what’s new and eagerly await the launch of the next season of their favorite video game.

With that in mind, the question investors are asking is if EA stock has a catalyst that will help push it to $100 and beyond in 2020? I believe it has several. Beyond the steady demand for its physical games, including a new “Star Wars” title EA will release late this year, the company is showing that it can move successfully into the digital space.

And at a recent event, EA CEO Andrew Wilson hinted that a popular title may be coming back. These are just some examples of why the runway for EA stock looks like it has plenty of room.

The Digital Revolution Is Underway

Over the past few years, video games have embraced digital technology. Although console games are still relevant — the new Sony (NYSE:SNE) Playstation and Microsoft (NASDAQ:MSFT) Xbox will retain disk drives — the space is clearly being taken over by digital games that users download. And the Fortnite phenomenon showed that the free-to-play game model is the future of the industry.

When Apex Legends launched in April, Baird analyst Colin Sebastian estimated that the game could generate up to $500 million in revenue for Electronic Arts in 2019. When you consider that EA generated $5.3 billion in revenue for all of 2018, this number takes on added significance.

More importantly, the battle royale game’s popularity (in one week the game had 25 million players) gives Electronic Arts validity in the free-to-play game space. While it’s fair to note that demand for the game did taper off, it’s logical to assume that more titles will be on the way soon.

Electronic Arts Would Love to Go Back to School

Two of EA’s legendary games were its NCAA Football and NCAA Basketball series. The company stopped producing those titles due to lawsuits stemming from the use of players’ likeness without compensation. However, Wall Street Journal tech reporter Sarah E. Needleman reports that a new court ruling may pave the way for a relaunch. A prospect that EA is very excited about.

In 2023, a California law would permit athletes at California schools to market themselves. The law, which faces opposition by the NCAA, would pave the way for players to get compensation for the use of their digital likeness.

EA CEO Andrew Wilson was quoted at the WSJ Tech Live Conference in Laguna Beach, California as saying the company “would jump for the opportunity” to get back in the college video game business. Although this issue has years to play out, it is an encouraging sign that the game still brings back nostalgic memories for gamers.

EA Stock Is More Recession-Proof Today

An uncertainty hanging over the economy today is the when, not if, a recession is going to happen. Back in 2009, the question of whether or not the video game industry was recession-proof brought mixed points of view. Some argued that, in tough times, consumers will continue to spend money on entertainment. Video games, and the accompanying hardware are, relatively speaking, a good value. Therefore, the industry would be recession-proof.

Others argued that at over $50 a game (for a new release), video games were not a no-brainer purchase, particularly in families that might be facing the loss of one or more incomes.

That was then. Today, the advent of free-to-play games has changed the landscape. Like Fortnite, EA now has a foothold in this area with Apex Legends. And you have to believe that more free games are coming down the pipeline.

There is no guarantee that gamers would continue to keep making the micro-purchases that allow them to upgrade and receive additional content. However, giving the gamer free access to the game removes a significant barrier.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.